Open Book (cost +) vs Fixed Price

[charlieroper]

I wanted to know if anyone had any experience of an open book/cost plus model for a main contractor.

 

We ran a formal tender process for our barn conversion & extension project in northumberland and were pretty depressed by the responses. We are now though in negotiations with one  of the builders who seems keen and we have trimmed a lot of the fat to get us more or less at budget. To try and realise even more savings the builder has proposed an open book contract where he shares all costs/timesheets etc and charges a flat 10% on top of that for the build. The alternative is the fixed price contract that is a bit higher than our budget already and has locked in compromises on finishes etc...

I'm thinking about this in terms of upside and downside risks.

 

Fixed price: Whilst the fixed price contract gives some downside protection there is still plenty they can come back to us on if things crop up (bound to happen on 150y+ old stone barns) so it is not full protection. There is also no upside for us, if the builder finds out that things are easier/in better condition they will pocket the savings themselves.

 

Open book: Clearly there is much a bigger downside risk here as it is more open ended but we're hoping the detail of our drawings (architects and engineers), the surveys we have conducted, should diminish this risk somewhat. As above though if they find something catastrophic we will end up paying extra regardless of the option. Biggest risk is that everything cost a bit more than expected so the overall number get's much bigger and we have to swallow it. The upside here is that there is no hiding, we get full visibility of what everything costs which means we're less likely to get ripped off and there is some scope for making savings if things are better than expected. We are also going to propose some kind of incentive on the builders to bring it in cheaper by sharing a portion of the savings that outweighs the lost profit - by way of example:

 

 

Really keen to hear peoples thoughts on this and whether or not they have come across an incentive structure like this in the past?

[bassanclan]

Are you going to be on site managing the project making sure everyone is doing what they should be doing every day? If so the the open book or managing subbies yourself can work, but otherwise the costs can run away and you can end up paying for phantom labour!

[charlieroper]

1 hour ago, bassanclan said:

Are you going to be on site managing the project making sure everyone is doing what they should be doing every day? If so the the open book or managing subbies yourself can work, but otherwise the costs can run away and you can end up paying for phantom labour!

 

We have the advantage of living on site (small cottage next door) so have the visibility but will be paying for a site manager. The company have an app for all trades onsite logging hours and a portal for submitting invoices so I think it should be ok on that front. Add to that we are using a builder who has worked closely with our architect (also contract administrator) for many years, and relies on them for future jobs, so there is a big disincentive to funny business I hope...

[nod]

in effect he’s turning your job into a daywork job With no incentive for anyone to get a move on 

You need some kind of fixed price With you paying material hikes which no one seems to predict 

[Jenki]

3 hours ago, charlieroper said:

 

We have the advantage of living on site (small cottage next door) so have the visibility but will be paying for a site manager. The company have an app for all trades onsite logging hours and a portal for submitting invoices so I think it should be ok on that front. Add to that we are using a builder who has worked closely with our architect (also contract administrator) for many years, and relies on them for future jobs, so there is a big disincentive to funny business I hope...

I'd be scared to death of this from the client side, and in my old role as main contractor happy as a pig in a dodoo.

As @nod says, the benefits here seem to be for the builder

Scenario 2 won't happen, as there's no need for the builder to cut costs.

 

Reading your other post, you are employing architect, SE, QS? If so you should be able to nail down the works required and have accurate BOM's and cost accordingly. Any unforeseen rise in material costs can be handled by negotiation.  Site manager? This is the role of the main contractor surely, if not it's another level of mis information/ mis communication and you will pick up the costs of that. This is a house build. Lots of component parts but straightforward.

Too many chiefs not enough Indians me thinks.

[saveasteading]

4 hours ago, charlieroper said:

anyone had any experience of an open book/cost plus model for a main contractor

Yes.  Made a lot of money. for my then employer not myself.

The client got good value as well though as we had no risk percentage, and they could change their minds.

 

So the issue is if 10% is the right figure. I would say it couldn't be less.

BUT if they choose to subcontract then they are reducing their admin and there are 2 sets of margins. Who decides?

Materials: Who orders it and who is responsible for efficient use. 2% waste in diy, 10% waste in contracting.

And the skips. Tell them there will be none after demo.. A skip costs £2,000  when you look at the value of the unused material dumped in it.

 

I don't know any of the people  involved, of course,  but I found that PMs can get very lazy with self sufficient contractors, as there is so little to do, and they get  a bit pally. They spend more time with the workers than with you.

That's better than creating disputes to show how tough they are though.

 

If you know what you want and how to do it, fixed price contracts to specialists and forget the main contractor, as you have an expensive PM.

If you don't, then what are these consultants doing? get a fixed price for what you can and agree 10% on the rest.

[Mr Blobby]

5 hours ago, charlieroper said:

I wanted to know if anyone had any experience of an open book/cost plus model for a main contractor.

 

We do, and despite all the whingeing I do here, I like it and it works ok.

 

The fixed priced tenders we looked at all had extra costs that couldn't be justified.  And a fixed price contract would lock in a detailed specification without any changes and lock me out of the site.

 

For us it works well but only because I have time to be on site every day to do the crap jobs that nobody else wants to do like sweeping cavities, getting airtightness detail right, and putting red bull bottles in the bin.

 

There are fixed prices as we go along, so fixed price for blocklaying, fixed price for metal roof, etc.  The builder overees progress, gets good prices for materials and, most importantly, gets good trades on site. I know from expereince that when I phone, say an eletrician, they don't even return my call, but will pick up the phone to my builder straight away. 

 

Open book arrangement also gives me the option to save some cash from things like buying the scaffold and provideing water and leccy on site.  This saves on the extortionate preliminaries in a fixed price contract.  I can also retain control over stuff like roof design and mvhr layout and do some of the work myself.  Even though I have no idea generally what I'm doing. 🤦‍♀️

 

Its not for everyone but if you want to be involved in the project and are prepared to cancel all your holidays (my wife is not talking to me) to be on site every day (and have a builder you can trust) then an open book arrangement is a good option.  It will be interesting, when I get to the end of the project to see how the cost compares to the FP contracts but I think so far it is looking very competitive.  

 

Edited April 10 by Mr Blobby

[Jenki]

5 hours ago, charlieroper said:

the lost profit - by way of example:

 

 

 

 

Scenario 3

Cost est ex profit £1000,000

Actual cost.    £1150,000 only 15%

Builders profit £ 115,000

Saving v est. £0,00

Builders share £0.00

Builders profit £115,000

Your costs £1275,000

 

Scenario 3 Builder ends up with the same as Scenario 2 you spend £260k more🫣

[charlieroper]

46 minutes ago, Jenki said:

I'd be scared to death of this from the client side, and in my old role as main contractor happy as a pig in a dodoo.

As @nod says, the benefits here seem to be for the builder

Scenario 2 won't happen, as there's no need for the builder to cut costs.

 

Reading your other post, you are employing architect, SE, QS? If so you should be able to nail down the works required and have accurate BOM's and cost accordingly. Any unforeseen rise in material costs can be handled by negotiation.  Site manager? This is the role of the main contractor surely, if not it's another level of mis information/ mis communication and you will pick up the costs of that. This is a house build. Lots of component parts but straightforward.

Too many chiefs not enough Indians me thinks.

 

Apologies in advance I think a lot of my terms aren't quite right!

The Architect and SE put together a massively detailed pack and we then paid  the QS to do a SoW (very detailed) for the tender process so we can see how they have costed everything, the problem is we lack the technical knowledge to properly question lots of parts of it. That being said we have managed to cut 30% off the cost by taking bits out and negotiating the prelims (+ some other small bits) so do feel like they have made an effort on that front. The site manager is part of the quote from the builder.

RE Scenario 2 I agree without incentive it wont but surely if they stand to make more money by bringing the cost lower that might make them want to or is it just too much of a pain for them to bother?

[charlieroper]

2 minutes ago, Jenki said:

 

Scenario 3

Cost est ex profit £1000,000

Actual cost.    £1150,000 only 15%

Builders profit £ 115,000

Saving v est. £0,00

Builders share £0.00

Builders profit £115,000

Your costs £1275,000

 

Scenario 3 Builder ends up with the same as Scenario 2 you spend £260k more🫣

haha yeah I don't want to think about that one!!

[saveasteading]

9 hours ago, charlieroper said:

peoples thoughts on this

I've often thought of it but it never felt right. 

I think I'm anticipating that there are arguments that a problem encountered isn't the builder's fault an so you pay the extra and he get the bonus still.

 

I'm more into ongoing feelgood such as praise and occasional bacon rolls or takeaways.

 

Another thought. The estimates I have seen from qs services to builders have always been cautiously high. then the builder adds some risk too.

Most builders aren't happy tendering so tend be high too.

I took our joiner's boq and discussed it with him. We bought the timber so he had much less risk. I think the price came down 20%. some special features I talked him through in terms of man-days instead of comonents by the m. which came to half of the qs cost.

On the other hand, the proper business has overheads and is used to risk. they might no want client dabbling.

 

It isn't simple.

[Dan F]

4 hours ago, Mr Blobby said:

 

We do, and despite all the whingeing I do here, I like it and it works ok.

 

The fixed priced tenders we looked at all had extra costs that couldn't be justified.  And a fixed price contract would lock in a detailed specification without any changes and lock me out of the site.

 

For us it works well but only because I have time to be on site every day to do the crap jobs that nobody else wants to do like sweeping cavities, getting airtightness detail right, and putting red bull bottles in the bin.

 

There are fixed prices as we go along, so fixed price for blocklaying, fixed price for metal roof, etc.  The builder overees progress, gets good prices for materials and, most importantly, gets good trades on site. I know from expereince that when I phone, say an eletrician, they don't even return my call, but will pick up the phone to my builder straight away. 

 

Open book arrangement also gives me the option to save some cash from things like buying the scaffold and provideing water and leccy on site.  This saves on the extortionate preliminaries in a fixed price contract.  I can also retain control over stuff like roof design and mvhr layout and do some of the work myself.  Even though I have no idea generally what I'm doing. 🤦‍♀️

 

Its not for everyone but if you want to be involved in the project and are prepared to cancel all your holidays (my wife is not talking to me) to be on site every day (and have a builder you can trust) then an open book arrangement is a good option.  It will be interesting, when I get to the end of the project to see how the cost compares to the FP contracts but I think so far it is looking very competitive.  

 

 

If everything is cost+, what is your builders incentive to complete the project as quickly as is feasible?  How about chasing sub-contractors; why should builder worry about managing/chasing/replacing sub-contractors (e.g. electrician) if the project taking longer doesn't impact him?  Surely there is a risk that things just drag on and on?  

Edited April 10 by Dan F

[charlieroper]

12 hours ago, saveasteading said:

 

 

Another thought. The estimates I have seen from qs services to builders have always been cautiously high. then the builder adds some risk too.

Most builders aren't happy tendering so tend be high too.

 

This is really one of the appeals as at the moment the fixed price contract is factoring in risk that we can't see so it's difficult to know what elements worry them. We're going to sit down with them next week to get down to brass tacks and figure this all out - will report back!

[charlieroper]

12 hours ago, Dan F said:

 

If everything is cost+, what is your builders incentive to complete the project as quickly as is feasible?  How about chasing sub-contractors; why should builder worry about managing/chasing/replacing sub-contractors (e.g. electrician) if the project taking longer doesn't impact him?  Surely there is a risk that things just drag on and on?  

 

Given we are living in a cottage on site (which we own) we don't have particularly onerous costs associated with overruns on the fixed price (I can't remember the official term for it but hopefully you get what I mean), it's a couple of hundred pounds a week which in the context of the overall budget is loose change. So I guess in either scenario there isn't a huge disincentive for them. We are really relying on the ongoing architect/builder relationship - they are relatively symbiotic so it would be very damaging to them to mess us about given the architect will be contract administrator. I do concede your point though and I will add it to the list!

[saveasteading]

2 minutes ago, charlieroper said:

ongoing architect/builder relationship -

Which one has overall responsibility?

[saveasteading]

6 minutes ago, charlieroper said:

going to sit down with them next week to get down to brass tacks

Great. If you accept that they are expected to make a reasonable profit, it's a good start. Then what can we do as a team,and within that, to make savings/ keep to budget? 

Huge, substantial, reasonable?

Define the risk areas.

[charlieroper]

1 hour ago, saveasteading said:

Great. If you accept that they are expected to make a reasonable profit, it's a good start. Then what can we do as a team,and within that, to make savings/ keep to budget? 

Huge, substantial, reasonable?

Define the risk areas.

Yeah this is key - they have to make money out of it and we want them to to make sure they do a good job!

[Mike]

On 10/04/2024 at 14:45, charlieroper said:

The alternative is the fixed price contract that is a bit higher than our budget already and has locked in compromises on finishes etc

I'd take the fixed price.

 

I'd only choose Cost + if there was a great deal of uncertainty about the nature or extent of the works, or the technical solutions that may be required. You're very unlikely to be in that territory.

[Omnibuswoman]

We went with the open book type of arrangement with our builder, over a higher cost fixed price contract. We were not on site daily, or even weekly, and left it to the builder to manage his team. 
 

We broke the contract by agreement once the house was weathertight, and I am now managing trades individually (when they actually turn up!).
 

Budget-wise, this has turned out to be the most cost effective method, but not without its issues. 
 

We had expected the builder to be on site a lot more than he was, and his team were a bit lazy. So we were left feeling that there were an awful lot of smoking breaks taken, and quite a lot of early finishes, with no consequence for the workers. The builder really didn’t have good management skills, and we felt that he made excuses for some poor behaviour. 
 

However, we got to the end of the contract without having had any significant falling out with him, and still think he is a skilled builder of low energy houses. Compared to going MBC or similar it did come in several tens of thousands cheaper for us, albeit that we still feel that things were not done that ought to have been. 
 

We placed a high value on maintaining our relationship with the builder, and him staying in business, and in that context we feel that we probably made the right choice overall. 
 

Self-managing trades is not for the faint hearted. The time it all takes is considerable. It seems to be really hard to get trades to turn up, even with what seems to me to be a great working environment. Definitely easier to manage costs, but almost a full time job. 

[PNAmble]

10 hours ago, charlieroper said:

We are really relying on the ongoing architect/builder relationship - they are relatively symbiotic

id really be worried about this.  Who is working for you ? and has the understanding it’s your money they are spending.  If they are so symbiotic what happens if there is a fundamental problem, can you trust them to fight your corner.

[Brickie]

I have a mate who carries out basement digs on this basis at times,and I believe the percentage is tiered as an incentive to keep costs down (I.e. 15% to £150,000 dropping to 10% thereafter,just as an example.) 

At first glance it might not seem like much of a carrot but bear in mind that if he ‘milks’ the job & breaks the threshold then,come the end of the job,he’s still tying up all the annoying loose ends,but earning a far smaller commission for his trouble. 

[mickeych]

On 10/04/2024 at 13:45, charlieroper said:

I wanted to know if anyone had any experience of an open book/cost plus model for a main contractor.

Yes - this is what we are doing for a stone barn conversion too. The reason we chose it was similar to your thoughts in that with every quote there were so many caveats and exclusions due to the age and complexity of the project.

It doesn't stop you worrying about how you are going to afford it but it does give you a high degree of transparency.

For the conversion of an old barn, no matter how detailed and careful you are in estimating or how brilliant a group of engineers and architects are in creating the original tender document, on my current experience there is absolutely no way that any estimate could capture the variables that we are seeing in this build. 

 

For example we surveyed the roof and timbers and estimated that 30% might need replacing - In reality the roof timbers were in far worse shape than the original survey suggested and we had to replace and repair a huge amount more than was planned.

All in all, the roof finally came in at 125% of the highest estimate range (including the 25% contingency we used) which whilst not great, at least this was not 'an extra cost' over and above the tender quotes that we would have had and we did have some choice in the way things were done.

 

I don't for a minute think that the cost+ is a perfect model, particularly as the contractor is not incentivised to find the cheapest materials so I do tend to get involved with larger purchases. As i see it, I am employing the contractor to build a property not manage my expenditure, and I do get a little concerned that the model relies on the accurate reporting of the teams time on site. We live in a cottage on site so we are able to be involved in making any and all key decisions and this also plays to what works for us. I would rather be over-asked than under-asked and with the cost+ everything is double checked

[Mr Blobby]

On 10/04/2024 at 23:26, Dan F said:

 

If everything is cost+, what is your builders incentive to complete the project as quickly as is feasible?  How about chasing sub-contractors; why should builder worry about managing/chasing/replacing sub-contractors (e.g. electrician) if the project taking longer doesn't impact him?  Surely there is a risk that things just drag on and on?  

 

There is still an incentive for our builder because he only gets paid according to the activity.  No progress, no payment. 

Our builder actually moves faster than I like and trades are always on site when required. 

 

I guess its about perception of risk and I'm ok with risk.  Besides, I'm not sure a contract and a fixed price eliminates risk altogether unless you are prepared to sue a builder for any breach of contract.  Which then means dealing with solicitors which is far worse that dealing with builders.

 

 

[saveasteading]

1 hour ago, Mr Blobby said:

paid according to the activity.  No progress, no payment

Meaning? you are watching and will say if its dragging?

On cost plus where labour is by the hour, then an hour passing is progress for the builder.

The project I mentioned many posts ago, was using a published book of rates (Spons) to which we added about 10% because they are already comfortable prices.

If something wqas required that was not in the book then it had to become either a sub-quote, or based on time and purchases.

[Mr Blobby]

52 minutes ago, saveasteading said:

Meaning? you are watching and will say if its dragging?

Most trades are on fixed price.  Some are on time+materials.

While some trades may sit on their arse drinking tea and playing cards all day if they are paid by the hour, this has not been my experience. 

I seem to have good trades who are happy to get on with the job even when paid by the hour.  I suspect such productivity stems from their relationship with my builder.  I reckon if I ran the project myself and engaged the trades directly they would be more likely to take the piss.